July 2005. China’s Cnooc oil company makes a bid to buy Unocal, the Union 76 oil company based in the United States. Congress strongly objects, and the Chinese back off. Chevron buys Unocal instead.

March 2006. Dubai Ports World, a company owned by a United Arab Emirates sheikdom, tries to buy terminal operations in six U.S. ports. There is so much opposition in Congress that Dubai backs off. The port operations go looking for an American buyer.

March 2006. An Australian-Spanish consortium bids to lease the Indiana Toll Road. Gov. Mitch Daniels’ administration supports the deal, but a majority of Indiana residents appear to oppose it.
Legislation permitting the deal passes the General Assembly. A court case is likely.

People in China, Dubai, Australia and Spain seem to have a lot of dollars to spend on American assets. Where are they getting all that money? From us. The United States is running a large trade deficit.

Actually, “large” is not the right word. The United States is running an astonishingly huge trade deficit. The deficit is about 6 percent of our nation’s production. That’s bigger than any trade deficit since we began keeping track in the GDP accounts in 1929.

In 2006, the United States will buy about $2.2 trillion in products from the rest of the world. We pay for those purchases with dollars. The rest of the world will use those dollars to buy about $1.4 trillion in U.S. products. This leaves other countries with about $800 billion to use in other ways.

The world’s investors can use these dollars in three ways. First, they can buy American products. Despite the deficit, this is still where most dollars go. Almost two out of every three dollars that Americans spend on the world’s products come right back to buy products from us.

Or the world’s investors can lend these dollars to Americans. Lately, this has been their second choice. China, for example, has more than $800 billion in foreign currency assets and holds three-quarters of it in U.S. Treasury bonds. This means China is lending us dollars to pay for the federal government’s budget deficit.

The world has been lending us dollars for mortgages, too. This has helped keep mortgage rates low even while the Federal Reserve has been increasing short-term interest rates. These low mortgage rates help drive the housing price boom that we hear so much about (even if we don’t experience it in Indiana).

The third thing the world can do with dollars is buy American assets. This is U.S. land, U.S. buildings, U.S. highways, and, most of all, U.S. companies. The Chinese computer-maker Lenovo bought IBM’s personal computer business at the end of 2004. That Australian-Spanish consortium bought the Chicago Skyway and, unless a court says otherwise, it will lease the Indiana Toll Road, too.

If we block these deals, world investors might decide to unload their dollars on currency markets. The value of the dollar would fall. This could help, since it would make U.S. exports cheaper, and we could sell more. This could hurt, too, since it would make U.S. imports more expensive, raising the prices consumers pay. And, if the world decides to take its wealth elsewhere instead of lending it to us, our interest rates would rise. No more housing boom. If it all happened too fast, things could get ugly.

We’ve had trade deficits every year since 1975, but, since 1999, they’ve gotten really big. Add up the difference between import and export spending over the past seven years, and you get about $4 trillion.

For the most part, the world has been content to lend those dollars back to Americans. But they may not be satisfied with the money they earn from mortgage loans and Treasury bonds. These interest rates have been pretty low for years, after all.

Some day they’ll want the higher returns that they can get from other American assets, like oil companies and highways. Maybe that day has arrived. We’re starting to pay for our imports by selling off our assets.

The world owns a lot of dollars. We’ve seen three big controversies over foreign purchases of U.S. assets in the last year. We will see more.